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31.96% annualized return on Monday’s trades

Two positions expired over the weekend.

music selection:  “I Won’t Pay” — The Offspring

weigh-in:  205.0 +1.6 – it is really challenging to put two good weeks together i a row.

Blackstone and Oracle expired out of the money over the weekend.  I still hold shares of BX and will write a fresh covered call against the position.  Oracle moved higher and became less attractive for a new written put trade as premiums were weak this morning.  I’m taking a pass and replacing them with Micron (MU) as an income play.

I am going with a new firm today, MarketAxess (MKTX).  For those of you who don’t know about the trading of bonds, most of the market does things the same way they have done them for literally centuries.  Someone literally picks up the phone and makes a call for each and every bond transaction.  The big banks maintain an inventory of popular bonds and act as broker-dealers, earning a spread on each bond sold.  This is a very profitable business for the broker dealers but is obviously inefficient.  One company (MKTX) has begun automating the process as a neutral broker.  They are gaining market share and should do well in coming years as new European regulations require bond brokers to document “best execution”.  Not only is the old way inefficient, it lends itself poorly to the new paperwork required.  MarketAxess will excel in the new regulatory enviorment.

MKTX is also wildly profitable and is a beneficiary of Metcalfe’s Law.  As they gain market share, their network becomes intrinsically more valuable.  Competitors will have a hard time overcoming their first mover’s advantage.  Today, I wrote a put MKTX171215P00180000 f0r 6.70 a share.  The trade will be in force for 40 days and yields 33.94% annualized while enjoying 3.03% downside protection against a decline in share price.  This is a larger than normal trade size for me but I’m willing to stretch a little for such a great business with fat underlying premiums to trade.

Blackstone (BX) is still a holding after the weekend’s covered calls expired worthless.  I sold BX171222C00034500 for 45 cents a share.  The trade will be in force for 47 days and yields 10.13% annualized.  I remain eligible for the underlying distribution of 6.57%.

Finally, I replace Oracle (ORCL) with Micron (MU).  Micron is a computer memory manufacturer with strong margins and cash flow.  It is also enormously cheap at under 10 times P/E.  I feel there is a strong margin of safety here in the event I end up holding for the long term.  I sold MU171222P00043500 for 2.90 a share.  The trade will be in force for 47 days and yields 51.77% annualized while enjoying 6.97% downside protection.  I’m very happy with this outcome.

The simple average of the three trades today is 31.96% annualized.  That should easily beat the S&P 500 or any other broad index this year.  I’m glad to be an active trader rather than indexer when I can earn superior returns while lowering my risks with options.

Devour your prey raptors!

{ 2 comments… add one }
  • Chris B November 7, 2017, 7:00 pm

    To nitpick, the actual ROI on those sold options will not be known until they mature or the position is closed. On the other hand, I’m not sure how clear it would be to say the annualized ROI on a sold put is “somewhere in the range of 51.77% and (43.50-2.9)×-100”. Maybe you could simply say something like “max gain is $500 (XX% annualized), max loss is $5,000” or “my target return is XX%”? This is a tradeoff between communication and comprehensibility.

    Your perspective on MKTX makes it an interesting candidate for further research. Thanks for sharing.

    • The Lizard King November 7, 2017, 11:05 pm

      Chris, it is hard to be both concise and precise with projected returns. For blog posts, I have always declared the return assuming a finish out of the money. For Transparency posts, I only count income that is fully earned with no outstanding liability remaining. That is still not the same thing as a percentage return because I only count the earned premiums and any earned capital gains/losses in the period. It’s a dollar amount in one venue and a percentage in the other. I’ll think about changing the language to ‘target return’.

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